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spk03: Okay, just one last one for me. Can you just maybe clarify a little bit of what's meant by the transition of the U.S. test to focus on youth theory? I think that was a reason that was cited for the lower international revenue goalposts. So can you maybe talk a little bit to that?
spk07: Yeah, so as we've been talking about for the last couple of years, we've had a U.S. test going on, a U.S. e-com test going on to see if Building the Jameson brand organically was something that would have a high return on investment. I think, as you can tell by our acquisition, we noted that that probably is not the best use of capital or best use of return on investment. It was better to acquire a brand and a platform from which to grow at. In the back half of this year, we had planned to do a digital expansion into a customer in the United States that had some revenue attached in our guidance. Since the acquisition and in speaking with that strategic customer, we've made the decision to not do that and to drive the growth and the business opportunity through the Utheory brand instead. So the guidance essentially has come out of the international business based on that strategic decision as we focus on the Utheory brand growth in the United States and not an organic Jameson brand growth strategy. Okay. In the overall scheme of things, George, I mean, the number is not real material, but when you have it into the international number, it does take a few points off of that international guidance.
spk03: Yeah, I'll ask maybe one more. You may not answer, but I'll ask it. The 10% to 20% guidance that you guys put out for the U.S., sorry, for international, would you expect China to grow at a higher clip than that?
spk08: China is certainly delivering more than their share of that growth. So we continue to be on track with our expectations in China full year, in spite of the softness in other areas that we've noted.
spk03: Okay. Thanks, guys. Thank you.
spk01: Next, we'll hear from John Zamparo of CIBC.
spk04: Thanks. Good afternoon. I'll continue on youth theory. And I think part of the attractiveness of this deal, and you've mentioned it both when you announced the deal and today, is you seem to have multiple levers for revenue growth. When you talk about innovation, channels, international expansion, I kind of wonder what's the order of operations on these and where can you make the most immediate gains?
spk08: So I think, as Mike mentioned before, it's really about expanding in the U.S., number one. So it's expanding the number of categories they participate in or adjacency within the same categories. That would be the most near term. Following that would be channel expansion, moving more definitively into food, drug, and masks. And then following that, based on registration timing and barriers to entry in international markets, the international would really be something that we would expect to start to deliver on in 2023. Okay. There's one thing I would add.
spk07: One thing I'd add to that, John, is we look at it kind of in two buckets. We look at it in revenue opportunities and synergies and, of course, cost synergies to drive margins to George's question earlier. The number one priority out of the gate is the revenue opportunities. Those revenue opportunities are quite vast. There's a lot of levers, as you've noted. And by growing that top line, we will build scale, we'll build efficiency, we'll be able to help drive those margin expectations that we have on the business. And at the same time, we'll be looking for cost savings. But really, this is a revenue opportunity first and foremost, followed by a cost energy opportunity that we'll be chasing.
spk04: Got it. Okay. When you talk about it being the U Theory brand being under penetrated in traditional channels, the retailers that I think of in those channels, whether it's CVS or Walgreens or others, I presume those aren't existing relationships or strong relationships at the moment for you. So I guess correct me if I'm wrong, but how are you thinking about getting into the larger traditional brick and mortar channels?
spk07: Yeah, so there actually is some distribution into these channels that we talk about. It just hasn't been a strategic focus for the company to date. It's something that they want to do. It's something that they've had in their strategic purview. They just haven't been able to do it. They didn't have the resources or time to do it. It's not a big team down there. So we are already in conversations with some of these customers. We have added and will continue to add some capabilities into the U.S. marketplace. We will probably leverage a combination of our own capabilities that we add to the organization as well as possible broker relationships that we have down there. We have embedded some people down there from Jameson. We have two people down there right now focused on the expansion. And what I would tell you is, It's some of our top talent in the organization here, and we're quite happy to see them down there starting to build on the strategy. So one of the strategies is to do that, and within our thesis of the investment, it was going after those channels by adding some capabilities.
spk04: Okay, understood. And then my last question, I'm impressed we've gotten this far into the call without talking about inflation in detail. But your pricing has adequately covered increased costs so far. I wonder what you're seeing on cost inflation in Q2 and subsequent to the quarter and how it's trended on a year-over-year basis compared to Q1.
spk08: So as you have learned from previous calls, we lock the vast majority of our input costs at the beginning of the year. So from a raw material input perspective, the environment remains strong. You've seen some of those prices increase earlier in fiscal 2022, and those increases have tailed off more recently as thoughts of inflation and higher interest rates creep into the discussion from an economic environment perspective. We are not seeing any material increases going into 2023 at this point in time, but we'll save final judgment on that for our final negotiations exiting 2022. The one area where we've continued to experience inflation is fuel and transportation. We still believe that that's impacted by geopolitical events, and it's not necessarily permanent in nature. So we will continue to cover those costs with our efficiencies. as we drive forward in fiscal 2022 and decide at some point in the future when and if we need to pass those costs on to the consumer. One thing I will note is that you've seen margin improvement in the first half of fiscal 2022. That has been impacted by the timing and volume of production, as well as segment mix. And when you add U-theory margin structure to the business, we have guided for some softness in our margin structure, both from a gross profit and an EBITDA margin perspective when you bring the businesses together in the back half. So take a close read of our guidance as it talks to gross profit and EBITDA margin as we set new benchmarks for those going forward with which we will then grow on.
spk06: Okay, that's very helpful.
spk04: Thanks so much. Thanks, John.
spk01: And moving on to Ty Collin of 8 Capital.
spk02: Hey, guys. Just going to tag in with another youth theory question here. In terms of the U.S. growth strategy going forward, Do you expect that you'll be looking around for other brands to kind of tuck into the Utheory platform, or is the focus just going to really be on growing organically at this point and porting Jameson products onto that platform?
spk07: Yeah, thanks, Ty, for the question. I'll answer it kind of two ways. In the short term, we're really focused on eutheria. We're focused on finding the revenue growth. We're focused on finding these cost synergies we're talking about. We're focused on accelerating the growth across the United States and the international markets and integrating this into the Jameson Wellness world. What I would say is longer term, we now have a platform in the U.S. that we could look to do some smaller tuck-ins. We could look to acquire more brands in the U.S. I would not expect that in the short term, though. I think this is a transformational acquisition for us This has a lot of upside, has a lot of, you know, it really allows us to accelerate our growth as a company. And we want to stay laser focused on ensuring the integration goes right, ensuring we take advantage of the revenue opportunities and the cost synergies in front of us. And when we feel we have a good handle on that and we have it sorted out, we could be in a position to possibly look at some further acquisitions to tuck in. So it's a bit of a short-term, long-term answer, but that's how we're thinking about it.
spk02: Okay, great. That's great color. And then following up maybe on an earlier question about the trade down or potential trade down, appreciate your commentary that you're not really seeing any trade down into private label or discount brands. But are you seeing any shift or starting to see any shift in channel mix at all? Maybe customers moving from drug into dollar store, for example, and If you are seeing that or if you expect to see that, does that have any sort of material margin impact to take note of?
spk07: We haven't seen anything specific or material from a channel shift perspective. From a margin perspective, we're pretty margin neutral across channels, so it doesn't impact us too much from a channel to channel perspective. I mean, I would say, though, if you listen to and you follow some of the retailers out there, they are talking about some shifting going on to more discount channels or drug channels, various channels that you're seeing overall consumer sentiment in and out of. We're not seeing anything material from a shift perspective, though. We're quite pleased with where everything is going, and our margins, as you see, continue to be strong.
spk02: Thanks, guys. That's it for me.
spk06: Thank you. Thank you.
spk01: And once again, as a reminder, if you would like to ask a question, you may do so by pressing star 1 on your telephone keypad. Moving on to Derek Lessard of TD Securities.
spk05: Yeah, good afternoon, everybody. Congrats on a good quarter. Just a couple, or maybe just one for me. Everything else has been answered. Maybe just going back to the domestic business and the strong margin performance there, just wondering if you can maybe add some more color, more on the branded side, and more specifically, what's the favorable mix that you're talking about?
spk08: So from a branded segment perspective, we talked about 120 basis point increase driven by mix, and that's category mix. So mix of higher margin categories, efficient trade investment, which is more volume driven by promotional activity, as well as the efficiency from a production volume perspective in our tablet facility.
spk05: Okay, that's fair. That's all for me.
spk01: Thanks, Eric. Moving on to Peter Sklar of BMO Capital Markets.
spk06: Mike, when you bring innovation from Jameson to Utheory, what's the regulatory process to get the product approved and how long does it take?
spk07: Yeah, thanks, Peter. Nice to hear from you. We've talked about this on some calls before. It's a little bit of a complicated process. world out there when it comes to regulatory. Most countries, including Canada, is what's considered a pre-market registered country. So you have to register the product and get a license from the government before you can sell it. The United States is not that way. The United States is a self-regulated market where you can launch product at any time, and it is on you to make sure that you are compliant with the FDA regulations. So there is really no barrier to entry for us in terms of innovation from a regulatory perspective to enter into the United States. It is more just about planning around timing, timing around retailer calls, timing around getting on the shelf. We're ready to go. We've already started talking about some products. I mean, I personally have already been to a meeting in the United States where we've talked about a possible innovation. So speed from regulatory is not an issue in the United States, and it's one of the beautiful things about doing business in the United States. You can move fast, and you can grab onto a consumer base with speed. So that's where that market stands there.
spk06: Okay, thanks. And then, Chris, can we just go through a couple of these adjustments in EBITDA? international market expansion 3.5 million what what does that represent yeah those are acquisition related costs so are those costs related to like to acquiring you theory or direct costs the acquisition so due diligence uh legal fees Okay. And then what about the other charge there? There's one for 1.4 million business integration costs.
spk08: Yep. And that relates to our IT system improvement costs. That's the difference we talked before about capitalizing something you own versus you're configuring where it's hosted third party. If it's hosted by a third party, that's a P&L charge today. So those aren't obviously in specific to revenue and income earned in the quarter, and those will be added back as we go through those projects.
spk06: And so the idea is to make your numbers comparable because before they were capitalized?
spk08: No, it's to make the number specific to operating earnings from a margin perspective in terms of what the business earned in the period, excluding costs that didn't go towards that earning potential.
spk06: You lost me there, but it's like it's a charge. You're paying for it, so I don't follow you.
spk07: So, Peter, it's a system implementation that we've talked about in the past. These are the implementation costs. In a non-hosted environment, you would capitalize those costs. These are the setup implementation costs to get the system up and running, that because we've gone with a hosted system, they have to be charged on the P&L, and we add them back. They're one-time costs from implementation, not the ongoing hosting costs or costs of the software. It's the implementation of the system. That's correct. Okay. Okay, got it.
spk06: Does that make sense for you? I want to make sure that makes sense for you. Is that clear? Yeah, it does. What you're saying, it's a one-time cost.
spk07: It's a one-time implementation cost that then goes away. The ongoing costs of the system never get added back.
spk08: Okay, got it. So just to be clear, we've guided that this is something that's going to continue for the next few quarters as we round out our supply chain software as well as our ERP from a broader business perspective. And they're included in the guidance from an outlook perspective.
spk06: Okay. And then finally, in the 6.5% revenue growth in the Jameson brands, how much price would be in that?
spk07: There would be very little price in that in the second quarter, Peter. If you go back to our conversations over the last few quarters, we priced the domestic business kind of middle of Q1, towards the end of Q1 in 2021, and we priced the domestic business again in the third quarter of 2022. There's a little bit of pricing embedded in there for international pricing, but the majority of that growth would not be pricing in Q2.
spk06: Okay. Okay, great. That's all I have. Thank you. Thanks, Peter.
spk01: And next we'll hear from Julian Hung of Steeple GMP.
spk00: Hi. I'm just speaking on behalf of Justin today. My first question is just to understand customer behavior a bit better. When you're increasing prices, have you seen customers switching package sizes, so maybe going from bigger packs to smaller packs or the other way around?
spk07: Hey, Julian, thanks for the question. You know, we, again, we haven't seen, usually when you see packaging changes, you would say that's some type of trade down or channel shift. We've not seen anything material in that space in terms of shifting. Now, what I would say, and I just alluded to it on Peter's question, is our pricing in the domestic market took place in Q3. So we'll continue to monitor and see if we see any of that in the future based on our new price points. But to date and in the last price increase, we haven't seen anything material in a shift like that.
spk00: Okay. And just to follow up on that, have you monitored your competitors to see if they've also been increasing prices? And if so, how much relative to what you've been doing?
spk07: Yeah, I mean, I don't want to comment too much detail about competitors. What I would say is we monitor that daily. We are pleased with where our price gaps are today versus where they were pre-pandemic and through the pandemic. We continue to monitor and make sure that we maintain the gaps that we think are competitive, set us apart and ensure that we recover costs to ensure our margins on what is a premium product. So I would say we're comfortable and happy with where those gaps are today.
spk00: Okay. Thanks for taking my question.
spk04: Perfect. Thanks, Julian. Appreciate it. Thank you.
spk01: And there appears to be no further questions at this time. We'll turn the conference back over to Mr. Palato for any additional or closing remarks.
spk07: Perfect. Thanks, Melinda, and thank you to everyone for attending the call today. We are extremely proud of these results. We continue to be laser-focused on delivering our commitments, focusing on our clear strategic priorities, and improving the world's health and wellness. We are on track to our long-term growth aspirations, and we really look forward to speaking to you all again soon. We wish you all a great evening, and thanks again for joining. We really appreciate it. Have a great night.
spk01: And that does conclude today's conference. We thank you for your participation. You may now disconnect.
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